"The conventional wisdom on Wall Street was that the economy was growing -- that the worst was behind us," said Peter Schiff, president of Euro Pacific Capital. "Now what people are realizing is the stimulus didn't work, and we may be headed back to recession."

U.S. markets were already sharply lower on widespread worries, including the weak job market. But the selling gained momentum as Japanese and European policymakers stepped in with dramatic measures to shore up their financial markets.

All three major indexes tumbled more than 4% Thursday and erased all their gains for the year. The indexes have also pushed into "correction" territory -- defined as a 10% drop from recent highs. The Dow, Nasdaq and S&P 500 have all fallen 10% in just the last 10 days.

"In the last two weeks, we've been through the ringer," said Rich Ilczyszyn, senior market strategist at MF Global. "When we start looking at the recovery, there's nothing to hang our hats on anymore."

The market's fear gauge -- the VIX (VIX) -- surged 35.8% to a reading of 31.8. A level above 30 signals a high degree of fear.

At the closing bell, the Dow Jones industrial average (INDU) was down 512 points, or 4.3%, with Alcoa (AA, Fortune 500), Caterpillar (CAT, Fortune 500) and Bank of America (BAC, Fortune 500) among the biggest drags on the blue chip index. Thursday's sell-off marked the steepest point loss since October 2008.

The Nasdaq (COMP) lost 136 points, or 5.1%. Some of the better performing tech stocks, Apple (AAPL, Fortune 500), Google (GOOG, Fortune 500) and Netflix (NFLX) were all down between 2% and 3%.

Fears about a global slowdown are at the forefront of investors' minds amid recent weak economic data. Early Thursday, the latest reading on jobless claims showed a large number of Americans remain unemployed.

In moves that they hoped would tame financial markets, Japan's government stepped in to weaken the yen, and the European Central Bank decided to re-enter the European bond market for the first time since March.

Those decisions come just a day after Switzerland intervened to curb the Swiss franc's rise.

"It's true that we are in a period of a high level of uncertainty, not only in the euro area but at the global level," ECB President Jean-Claude Trichet said in a press conference Thursday.

The ECB wasted no time and immediately started buying European bonds while Trichet's press conference was still going on. But bond traders were quickly disappointed, after they discovered the central bank only bought Portuguese and Irish debt -- not the Spanish and Italian bonds at the center of the crisis.

The ECB also left interest rates unchanged at 1.5% and initiated a 6-month refinancing operation to add liquidity to European markets.

Meanwhile, it should come as no surprise that in the U.S., investors flocked to assets perceived as low-risk, including Treasuries and gold.

Treasury prices rose, pushing the yield on the 10-year note down to 2.43% from 2.6% late Wednesday, and gold futures for December delivery fell $7.30 to $1,659 an ounce. Earlier in the session, gold hit a record high of $1,684.70 an ounce.